In an industry as active, interlinked and complex as finance, the notion of putting clients’ interests first is frequently called into question.

At a time when trust is at a premium, we examine the areas most open to ambiguity.

The examples are few and far between, but notorious. It may be fashionable to decry investment banks’ supposedly voracious pursuit of profits at all costs but the industry’s own mantra remains “clients first”, a principle that firms contradict at their peril.

Credit Suisse First Boston risked – and received – the ire of the Street in 2003 when it resigned as a joint broker to Safeway to join private equity house KKR on a bid for the UK supermarket chain.

Competitors lambasted the bank for apparently ditching its client of eight years in pursuit of the fees associated with financing and advising on an acquisition.

But today’s dealmakers say the fact that its decision, almost 10 years on, is still infamous indicates how successful firms are in representing their clients’ interests.

In the UK, the corporate broking system, where banks are mandated to represent listed clients, establishes their responsibility to act in support of specific companies. But while this is clear-cut, the broking business throws up potential conflicts of its own.

The head of corporate broking at a UK firm said the retained nature of broking makes it clear to banks how they should behave.

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He said: “With a broking mandate, from the day you take it on, you should be working to ensure that no other part of the bank gets it into its head that it can act against that client. For big banks, conflict management is a huge task and if you don’t do it successfully, you’re not going to survive.”

This, however, is easier said than done for a bank with a number of mandates, believes Oliver Hemsley, founder and chief executive of mid-cap broker Numis.

He said: “Advisers could be made party to confidential information from one client, which would have a direct adverse impact on another client and would put the advisers in a difficult position from a ‘duty of care’ perspective.

“More specifically, two clients might target the same third party, whether it’s a corporate or a group of assets.”

Avoiding conflict

Many believe brokers can avoid conflicts by limiting the number of mandates they take on. In April, Deutsche Bank’s UK chief executive Colin Grassie told Financial News that the bank was approaching the “efficiency frontier” of FTSE 100 brokerage appointments at 21, and several broking heads put the number at around 30.

Others are reluctant to put a ceiling on the number of mandates a bank can safely accept but said that there could be a limit to the number of market-leading companies a firm can represent within a particular sector.

One head of corporate broking at a bulge-bracket US firm with a big broking business said: “If we were brokers to GlaxoSmithKline, we would not go and seek to be appointed brokers to AstraZeneca without getting approval from the board of GSK to do so and I would be amazed if they would give it.”

He pointed out that it would be impossible to provide impartial advice to two clients likely to compete for the same assets.

He added that companies themselves took account of banks’ existing clients when appointing brokers but that a pre-existing personal relationship – for example when a banker joins a new firm – could trump such concerns.

Whereas an existing corporate broking mandate can act as a self-regulating mechanism when dealing with potential conflicts, it can be trickier to avoid clashes where no such relationship exists.

One capital markets veteran, now a senior executive in London at a big US bank, said conflict had been a feature of his career. He said it was always best overcome through active communication.
He said: “But that isn’t always possible when you’re working on deep M&A.

There are very few firms at the top of each sector and it’s just the way of the world that if one wants to go and buy something, another will too. It can get to the point where you have two clients wanting to bid for the same asset.

As an institution, you’ve pitched it to both of them, they both like it and want to proceed but you have to choose which one to go with. That’s a dreadful position to be in, so the key thing is to try and avoid taking the same idea to too many people.”

There have been cases, too, where advisers on a failed deal have shortly afterwards been hired to act for another party on a deal involving their former client. Deutsche Bank and HSBC found themselves in that position in October last year, when they were named as advisers to security firm G4S in its bid for the facilities services company ISS, six months after they acted on a pulled IPO for the target.

Hemsley said that the case for turning to a genuinely independent source of advice was easy to make in such cases but was not necessarily in clients’ best interests.

He said: “This does not always translate into helpful advice as independent advisers give their views on their market when they’re not day-to-day practitioners and lack genuine insight.”

The head of corporate finance at a large continental bank said that targets in that scenario might prefer banks with knowledge of the company to be advising bidders.

He said: “The advisers will still be subject to non-disclosure agreements and the company might feel that it would be in their interests for bidders to be advised by a firm that’s well-informed.”

Market participants working outside the bulge-bracket institutions point out that potential conflicts for the banks relate not just to their issuer clients but to investors as well. They say that banks will always be primarily concerned with winning business and that the interests of investors are a lower priority.

Michael Wagner, a partner at Oliver Wyman, believes that investors, while they like the research corporate brokers provide, sometimes lose sight of the fact that brokers are mandated to act in their clients’ interests only.

He said: “It’s an inherent conflict and, while a very public one, raises questions for regulators about whether they can rely on investors to have the right amount of awareness about where brokers’ loyalties lie, and whether regulation is necessary.”

While the big investment banks cite their scale as a means of avoiding conflict, with different bankers able to work on different deals, the much smaller houses claim that their size is also an advantage, giving them less of a direct interest in the market on which they advise.

Amir Hoveyda, a bulge-bracket veteran with 23 years’ experience in the debt markets, now advises clients on managing derivative exposures and loan disposals at the boutique StormHarbour, something he believes his firm can do better because of its lack of a large balance sheet and legacy positions.

He said: “On the advisory work we do with financial institutions and public sector entities, many of the big banks are conflicted, either because they have their own assets or they are counterparties to derivatives contracts. This eliminates their ability to advise clients in an independent manner.”

• This article was first published in the newspaper on Monday 19 November, 2011